Equities – Turkish Market News

Public Banks: One More Leak to Plug

To date we have posted two articles specifically focused on differentiates between public and private banks. As they have been in many developing economies ─particularly in India─, banks controlled by the government are milked to the bone with being forced to provide lending to sustain economic growth at the desired levels. This is also the case in Turkey (read Turkish Banks: Differentiating Rapidly, Loan Growth: Where do the Expenses Come From?).

Above we present loans-to-deposit ratios for private and state-run banks along with up-to one-month liquidity requirement ratios where state-runs have traditionally a lower l/d spread (left axis) meaning a stronger funding capacity however, relatively lower LRRs (right axis), also shows the maturity mismatch between their longer-dated assets and short-term financing. This is an interesting case that should be noted in our view. That said, regarding the liquidity Vakifbank (BIST:VAKBN) is relatively in worse shape when compared to its state-run peers.

Turkish Banks: A Deceleration in Earnings

We have been closely monitoring the banking sector in Turkey as the industry is usually at the focal point for investors looking at the country. Previously we analyzed the declining earnings in the industry and our finding suggested that the monetary policy framework causing higher uncertainties around FX and interest rates was the main culprit.

Turkish banks’ ROAE dipped in mid-2015 when the profitability metric was slightly higher than 10% across the board. That also marked the end of the downtrend as the industry started to post higher earnings since.

Turkish bank’ ROAE stood at 13.3% in October according to the official data, which also suggest that industry as a whole deserve to be valued below book value since the estimated cost of capital remain in the 15%-16% range. That said, we see the Visa sale proceeds being accretive to the earnings, as core revenues growth records a 16% despite the surge in net income.

Turning back to October results, banks managed to grow their interest income and fees 19.5% and 11.7%, respectively, on a trailing twelve-month basis, while opex only increased by 3% as the continuation of the single-digit growth that has in place for the past five months run-up to October. That said, provisions built being lower 23% demonstrated the intact asset quality, and along with the solid cost control, left their marks as the improving key fundamentals. However, we saw the adjusted quarterly net income declining by 4%, making it hard to convince that the current earnings growth rates are sustainable and a deceleration is very likely once base effects of the one-off items fade away.

Non-Financial Sector Debt: Impending Risks

Previously we noted that Turkey debt will draw attention as global monetary conditions were set to be less friendly to developing economies than it had been in the past. Following the Trump win, we have seen a bond rout in the United States, resulting in higher yields that simultaneously putting emerging market assets to the fire.

We think it is time to place some emphasis on Turkish corporates debt as pundits tend to conceive about increasing financing costs of those businesses which would ultimately cause a protracted earnings recession.

Turkish non-financial companies’ open FX position rose to $212.8 billion (+1.2% m/m, +17% y/y) in September according to the data released by Turkish central bank. This has been intensely pointed by the critics that each TRY0.01 deprecation against the US dollar would accretive to financing expenses TRY2.1 billion, give or take. Our prospect is for increased inflationary pressure.

FX-denominated liabilities of Turkish non-financials have been steadily rising since late 2010 when the central banks of developed economies introduced ZIRP world. Eased global monetary policy conditions paved the way for Turkish corporates since domestic savings are enough to finance Turkey’s economic growth. By this one could assert that one of the pillars of Turkey’s economic success has been the private debt. Assets, on the other hand, have also risen, been more volatile, but more importantly on the decline over the past several months, which might be explaining the weakness in Turkish lira. Note that FX assets were $98.6 billion in September (-5.1% y/y) and liabilities climbed to $311.4 billion (+9% y/y).

The crucial point of this article is offer here. As visualized in the chart above, companies’ investments abroad are on the rise while their FX deposits as well as export receivables are declining. We find Turkish corporates growing their investments abroad noteworthy. On a separate note, deposits, export receivables, and DIAs were $67.1 billion, $10.6 billion and $20.7 billion, and of total assets, representing 68%, 10.8% and 21%, respectively.

Finally, on the liabilities side, it’s loans, the loans, nothing but the loans. Accounting for 90% of total liabilities, Turkey’s real sector has a payable book of $280 billion to the banks, while import payables have been clearly declining mostly due to slowing domestic demand for imported goods. FX loans growth around 9% is also alarming given the volatility in exchange rates.

Nevertheless, the data suggests that there is no sign of a maturity mismatch as 79% (25%) of assets (liabilities) is set to mature in one-year period, which means Turkey’s corporates only have a short-term net FX open position of $1.3 billion. However, it has noted by many economists that a significant part of the long-term liabilities is typical one-year-plus-several-days debt which papers over the cracks.